Crystal ball gazing on the 'big five' insolvency issues

​It has become our recent practice to dust off the crystal ball and look ahead to what we expect will be the ‘big five’ insolvency issues.

Below is a retrospective assessment of how we did last time and our best guess as to what will dominate the next 12 months.

The big issues for 2013

Our ‘top five’ picks for last year were:

litigation funding

the defence to insolvent transaction claims by liquidators

the liability of banks for knowingly assisting directors in a breach of trust as a consequence of granting securities while insolvent

the regulation of insolvency practitioners, and

the reform of section 280 of the Companies Act 1993.

The big issues for 2014

This year, our picks are:

a continuing focus on insolvent transactions

more recovery actions relating to the finance company collapses

a revival of enthusiasm for voluntary administration

Supreme Court guidance on IRD priority, and

continued delay in implementing the regulation of insolvency practitioners.

How it went in 2013

Litigation funding

The Supreme Court was asked to determine the appropriate level of disclosure in cases involving litigation funders. It decided that the courts have no general role of regulating third-party funding. In the ordinary course, only the existence of the funding agreement and the location of the funder, but not the agreement itself, must be disclosed when a proceeding is issued. See our earlier commentaries here and here.

Insolvent transactions

The Court of Appeal was asked to clarify the scope of the “good faith” defence for creditors trying to retain payments made by an insolvent company against the liquidators’ powers of claw-back. The Court found that value must be given at the time of payment, or after payment was made, to make out the “gave value” limb of the defence. Value given before payment was insufficient. Only in exceptional circumstances can a creditor give value by forbearing to sue or discharging previously incurred or existing debt. See our earlier commentaries here, here and here.

The liability of banks for knowingly assisting directors in breach of trust

In 2012, the Court of Appeal of Western Australia held that lenders could be liable for knowing assistance in directors’ breach of duty and knowing receipt. A syndicate of 20 banks which took securities while the Bell Group was insolvent were ordered to pay back all the money they recouped from the securities, together with compound interest.The High Court of Australia granted leave to appeal, and the full court was due to hear the appeal in September 2013, but the case settled before the hearing. As far as we are aware, the Court of Appeal’s decision hasn’t been followed in any New Zealand case but we continue to expect that it will have an effect on lending practices.

The regulation of insolvency practitioners

It was expected that the Insolvency Practitioners Bill would come into force in late 2012 but progress has been slow. Many in the industry remain dissatisfied with the proposed registration system. INSOL New Zealand and NZICA have proposed an alternative self-regulating regime for insolvency practitioners which has received general support. The second reading of the Bill took place in September 2013. The Commerce Minister will be introducing a Supplementary Order Paper (SOP) that proposes further amendments.

The reform of “conflict provisions” in section 280 of the Companies Act

The Bill also amends section 280(1)(cb) of the Companies Act, which prohibits the appointment of insolvency practitioners as liquidators or administrators where they (or their firm) have had a “continuing business relationship” with the insolvent company, its major shareholders, or any of its directors or secured creditors. The Bill proposes to remove “secured creditors” from the list. This would be a welcome amendment but (as above) has yet to be advanced.

In 2013, the significant insolvency events were the Solid Energy creditor compromises, the receivership of MediaWorks and the receivership and liquidation of Mainzeal.

What about 2014?

As the economy has improved over the last 18 months, there has been a gradual slow-down in insolvency activity. While investigating and forensic accounting work keeps many insolvency practitioners busy, there have been relatively few large receiverships, liquidations or administrations. The exceptions have been the Southern Cross Forest Products receivership and the recent Postie Plus administration.

Many practitioners and lawyers are still involved in legacy work relating to the GFC and the finance company collapses, but that should start to tail off by the end of the year.

Parts of the economy remain under pressure: for example, the hospitality and traditional retail sectors. They will both find trading conditions more difficult this year, as costs increase and pressure from competitors becomes more intense. The high New Zealand dollar will also continue to have an impact on many businesses. The Reserve Bank has reported that the country’s dairy sector remains highly indebted and vulnerable to a fall in commodity prices and to rising debt servicing costs.

Top five

Still a lot of heat on insolvent transactions. The Supreme Court heard the creditors’ appeal in February on Fences & Kerbs and we are waiting for the decision. Many liquidators are actively looking at potentially insolvent transactions, although there is a sense of growing disquiet about how the whole regime operates, with some practitioners keen to put some boundaries on the claw-back of payments.

The Financial Markets Authority will continue to work closely with liquidators and receivers to recover funds for finance company investors. These cases will continue to attract media attention, although many will probably be settled out of court. In addition, we may see a judgment in the Feltex representative action, where investors are claiming $185 million in damages against Feltex directors and others.

Some practitioners are having a second look at voluntary administration (VA) and the advantages it may present when rehabilitating a business. The Postie Plus administration will be followed by practitioners with interest. VA is a valuable tool when supported by a GSA holder and can achieve a positive outcome without the same degree of reputational concern as receivership for trading banks.

The Supreme Court will rule on whether the Inland Revenue is able to jump ahead of liquidators and receivers in the queue for payment where cash is available in a liquidation and PAYE tax is owed. The Court will hear submissions on that point later this year.

The Insolvency Practitioners Bill won’t come into force until 2015, at the earliest. With the House rising on 31 July for the 20 September election and no sign of the Minister’s SOP, it is unlikely that the Bill will be passed into law anytime soon. We expect that the proposal made by NZICA and INSOL NZ for the self-regulation of insolvency practitioners will continue to gather momentum.

Our thanks to James McMillan for writing this Brief Counsel. For further information, please contact the lawyers featured.